eToys lays off 700 employees, shutters warehouses

The other shoe dropped at eToys Thursday when it announced that it was laying off 700 of its 950 employees and shuttering a pair of warehouse operations. It also said it no longer expects to reach profitability in fiscal 2003.

The news came as no surprise to analysts following last month’s warning not only of a wider-than-expected loss but that its third-quarter sales would come in between $120 million to $130 million, roughly half of what it had previously expected.

eToys (Nasdaq: ETYS) shares closed off 6 cents to 16 cents a share ahead of the news.

On Thursday, 380 employees were given pink slips. Another 320 will be axed by March 31.

eToys said it planned to shut down warehouse operations in the City of Commerce, Calif., and Greensboro, N.C., in the next 30 to 60 days, consolidating those operations within eToys' existing distribution centers in Ontario, Calif., and Blairs, Va.

As a result of a revenue shortfall, eToys said, it will run out of cash around the end of March. It has begun exploring options to sell the company or its assets.

“The lesson learned from eToys is that people do want to buy toys online but they also don’t necessarily need a new brand,” said Kevin Silverman, an analyst at ABN AMRO. “Second, if you’re going to try to build a new business, you can’t build it needing $600 million to $700 million in sales just to break even.”

The company also said it would close its United Kingdom Web site on Jan. 19, and fully wind down its European business shortly thereafter.

Last quarter, eToys posted a loss of $41.8 million, or 33 cents a share, on sales of $26 million.

First Call Corp. consensus expects it to lose 44 cents a share in the third quarter and $1.39 a share in the fiscal year but those estimates will likely be revised higher in the near future.

Silverman said that despite the meltdown, eToys still has some valuable assets, namely its brand, some inventory, its fulfillment centers and some software.

“But right now, I don’t see any urgency or motivation for someone to come in and pay a couple hundred million dollars for it,” he said.

The stock moved as high as $28 a share last January before falling to a low of 3 cents a share in December.